Crisis Talk - The World Bank Group

History Lessons

As the crisis enters its second year, the economic history books have already begun publishing an early account of first stages of the crisis. In particular, two articles have been released this week that serve as essential reading.

First, this month's Vanity Fair features an excerpt from Andrew Ross Sorkin's upcoming book, Too Big to Fail. Sorkin's piece gives a thrilling, minute by minute account of the chaos within the halls of Wall Street during the aftermath of the Lehman collapse. The article offers a view of the day's events through the perspective of the most important players in finance, including Timothy Geithner.

Stress Testing: An extraordinary balancing act

The IMF held an unofficial discussion yesterday morning on what the financial crisis has taught us about stress tests. (The discussants were very clear—none of the views expressed at the meeting represent the official views of the IMF. The same is true of the summary here.) 

The conversations highlighted the delicate balance that such tests need to achieve. When creating the parameters for these tests, how do we "think the unthinkable", while still adopting reasonable parameters that provide credibility? How do we decide if a 25 percent exchange rate depreciation is enough, or if 50 percent is too much? How do we design a scenario that is exceptional, but plausible?